Worried about rising prices? For the first time in years, Aussie government bonds are yielding enough lock in above-inflation returns for the next decade. TIM HEXT explains.

• RBA hike likely a one-off, not a new cycle
• Australian bonds offering attractive real returns
• Browse Pendal’s fixed interest funds

AUSTRALIAN government bonds are offering their best value in years as markets adjust to the Reserve Bank’s February rate hike, says Pendal’s Tim Hext.

Australian 10-year government bonds now yield around 5 per cent, with state government bonds yielding 5.5 per cent. That means investors can lock in real returns – returns above inflation – of around 2.5 per cent on risk-free assets.

Hext says this is a significant shift for retirees – who no longer need to take on equity risk to beat maintain the spending power of their savings.

“For most of the last decade, you were barely getting any returns above inflation,” says Hext, Pendal’s head of government bond strategies.

“Now you can buy a government bond – a risk-free asset – for 2.5 per cent over inflation.

“If you hold that for the next 10 years, you are guaranteed a return of inflation plus 2.5 per cent.

“You used to see super funds talk about their target being inflation plus three or four – and it was quite hard to hit that without a strong economy. Now you don’t need a strong economy to get that – and that’s a wonderful thing.”

Hext appeared alongside ANZ’s head of Australian economics, Adam Boyton, at the Pendal webinar The 2026 outlook on inflation, jobs and rates.

A speeding ticket, not a new cycle

The RBA lifted interest rates by 25 basis points in February – the first increase in rates since 2023.

But both Hext and ANZ’s Boyton suggest this may be the only rate hike this year as the early move looks likely to get inflation back under control.

Hext called the rate hike “a speeding ticket on an economy which was just going a little bit too fast” rather than the start of a new tightening cycle.

Boyton says the impact on consumers and business should show up quite quickly in the economic data.

“Even though I’m relatively optimistic on inflation, I still have no problem with what the Reserve Bank did,” says Boyton.

“It’s about getting some insurance and ensuring that inflation doesn’t get out of control.

“Because what we all miss is that inflation is a tax on everyone – and it’s a tax you cannot avoid every time you spend money in the supermarket.”

Inflation outlook improving

Still, inflation remains the dominant factor in the economic outlook.

“Number one is inflation, number two is inflation, and you can probably guess what I’m going to say for number three,” says Boyton.

“If I was to nominate one thing that will define the way people think about the economy in the first half of this year, it will be inflation – is it getting back to the band, or is it staying around its current 3.25 per cent to 4 per cent?”

Boyton expects inflation to come in lower than RBA forecasts by May, supported by moderating consumer spending and a rising Australian dollar, which helps lower import prices.

Wage growth is also slowing as public sector agreements that peaked at 7-8 per cent are now tracking toward 3.5 per cent.

“The Federal Government recently signed a 3.5 per cent agreement, and I think the RBA would be reasonably happy if they saw that across the economy,” says Hext.

“Wages … around 3.5 per cent is not going to have the same inflationary impulse,” he says.

Investment impacts

Hext says Australian government bonds have underperformed US bonds by 60-70 basis points, making them attractive on a relative basis. Global investor interest in Australian bonds is increasing significantly.

“We’re in quite a positive risk environment. You can see that by equity markets overall, and credit spreads are doing very, very well globally.

“It’s a relatively benign environment. I’m not saying that we’re going to see negative growth or poor risk markets, but I think the best is probably behind us.

“In other words, it’s not a bad time to lock in these returns.

“The balance of risks is definitely now in your favour, given current pricing, and I would encourage investors to take advantage of that.”  

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

Here are the main factors driving Australian equities this week, according to investment analyst JACK GABB. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

SOFTWARE stocks continued their sharp fall; using the US tech software ETF as a proxy the sector fell 10% last week, taking year-to-date losses to 22%.

The catalyst has been the proliferation of AI tools, with the latest being a new automation tool by US company Anthropic targeted at the legal sector, this also triggered selling in the legal, publishing and financial data companies.

The potential for contagion also hit the alternative asset managers from over-exposure to credit risk.

Even after a sharp rebound in the US on Friday, the S&P 500 ended the five-day period down 0.1% while the NASDAQ lost 1.8%.

That left the S&P/ASX 300 down 2% last week, pushing the local technology sector down 11.4%. Financials (+1.5%) were the only sector to make gains.

The ASX recovered strongly today.

The RBA hiked rates, as expected, with markets moving to price in another increase by August.

US economic news was limited, with key CPI and jobs data due this week.

Bonds were fairly muted, with rate expectations little changed in the US.

Software meltdown

While Anthropic’s new tool itself is not overly significant, the news reinforced the sector bear thesis, which is that AI lowers the cost of building software, increasing competition from insourcing and AI-native startups.

This, in turn, sees margins compress as incumbents embed AI at lower gross margins than the 75-80% they’ve historically enjoyed.

Seat-based pricing is disrupted as AI agents replace human workflows. Moats erode, growth deteriorates, margins deteriorate.

These fears have become ubiquitous and applied to all software companies, leading to the level of selling being three times anything we have seen in the last 10 years.

The sector is deeply oversold, and while the fears are arguably overdone, the reality is that the burden of proof has shifted: software companies must now demonstrate their ability to navigate the AI transition.

The signposts of this include revenue stabilisation, enterprise preference for incumbents, AI-native failure rates, successful business model transitions, and insider buying.

In our view, while there are escalating threats to the sector, the consequences of them are more nuanced, not uniform and may not be as extreme as inferred in share prices.

Moats in the software space can extend well beyond product – domain expertise, regulatory relationships, distribution, and data “flywheels” (the feedback loop where data is used to refine and improve AI models, encouraging more users, which provides more data) at scale are not easily replicated.

The economics also do not obviously favour disruption: pure-large language model (LLM) architectures carry materially higher costs than hybrid approaches, and AI-native startups face a margin trap in that compute costs are falling but model complexity is increasing, and customer acquisition remains expensive.

The disruption risk is not uniform – small-to-medium businesses lack the resources to insource using AI tools, while enterprises can and will consider alternatives.

There is also a logical gap: for AI to be this disruptive it must be rapidly adopted, and if rapidly adopted it must deliver real value – in which case incumbents controlling the system of record are the logical beneficiaries.

Finally, in our view AI is a total addressable market (TAM) expander, not a TAM destroyer. The addressable market potentially shifts from around $600-700 billion in software to incorporate substituting labour which could add materially to the revenue opportunity.

Looking at valuation, the software sector doesn’t look particularly cheap on revenue multiples. However, price/earnings (P/E) tells a different story.

While consensus is currently expecting 15% two-year revenue growth for the US software sector, the P/E implies the market is expecting a significant decline in growth expectations.

Looking at some of the key Australian stocks: Technology One (TNE) and Xero (XRO) are well positioned, in our view, but Wisetech (WTC) faces higher risks.

Technology One

• External value metric pricing provides natural insulation against seat displacement.
• Direct sales eliminate channel conflict.
• Over 99% customer retention and about 70% share of Australian local councils creates extraordinary switching costs.
• AI has already been deployed across the platform with a sensible dual-pricing approach.

Xero

• Is well positioned but must execute.
• Per-entity pricing avoids seat-based disruption.
• Domain depth in accounting creates vertical-like defensibility, despite horizontal customer reach.
• Early AI adoption metrics are encouraging – 73% customer usage, 300,000+ subscribers on new AI features within three to four months.
• Risks are partner channel tension and competitive pressure from Intuit.

Wisetech Global

• Faces higher risks, in our view.
• The Cargowise pricing transition makes strategic sense, but execution has been poor and there is a risk that their largest customer, DSV, moves to an internal solution.
• There have been delays in delivery of AI capability, raising questions.
• Unlike TNE and XRO, WTC’s pricing model creates friction rather than alignment with customers, in our view.

US policy and macro

US rate cut expectations rose slightly during the week, mostly on the back of softer labour data.

There are now 2.23 cuts implied, versus 2.12 prior.

Initial jobless claims came in at 231,000 versus 212,000 expected and 209,000 prior. Challenger data showed 108,000 layoffs in January (+118% year/year). The December JOLTS job openings rate fell to 3.9% (from 4.3%), the lowest level since April 2020.

More positively, the University of Michigan sentiment survey showed inflation expectations over the next 12 months have fallen to 3.5%, versus 4.0% in January, with the five-to-10-year expectation rising to 3.4% from 3.3%.

In addition, the ISM Manufacturing survey beat expectations, with January coming in at 52.6 versus 48.5 expected and 47.9 prior. That marks a strong turnaround and the strongest number since 2022. New orders and production both surged.

The ISM Services survey also came in stronger than expected at 53.8 versus consensus at 53.5 and 54.4 prior, although underling metrics were less positive than manufacturing with employment 50.3 versus 51.8 expected and prices rising to 66.6 from an upwardly revised 65.1.

Key data this week is January CPI, December retail sales and the January employment report – which will include the annual revision to the jobs count.

Macro and policy Australia

The RBA confirmed its outlier status among global central banks, hiking by 25 basis points to 3.85% in a unanimous decision that was more or less in-line with the 70% hike expectation.

Commentary was also hawkish, with inflation expectations revised sharply higher and the RBA admitting inflation is more broad-based and persistent than first thought.

It is now likely to remain above target for some time, which has prompted markets to more than price in another hike by August.

The decision to hike comes despite RBA forecasts of slowing GDP growth and higher unemployment and suggests it is more willing to accept softer economic outcomes in order to rein in inflation.

The consumer price index (CPI) is now seen at 4.2% to June 2026, versus 3.7% previously.

Assuming two cuts in the first half of the year, growth (and inflation) is likely to reduce in the second half, particularly given the stronger AUD.

The inflation outlook is also likely to add pressure on the May budget to deliver higher taxes (and/or curb spending), which likely also weighs on spending.

Importantly, while ‘short-term inflation expectations have risen in Australia since the November Statement’, ‘longer term inflation expectations remain well anchored,’ according to the RBA.

Moreover, the RBA does expect financial conditions to become modestly restrictive under the assumed path for interest rates.

Europe and the UK

The Bank of England voted five to four to hold rates steady, with the Chief Economist saying they are on track to bring inflation back to a 2% target in April. Inflation is expected to stay there, or dip lower, over the coming three years.

The European Central Bank also kept rates on hold, with its President saying the stronger Euro could bring inflation down beyond current expectations.

Commodities

It was a volatile week for commodities and mining equities, if not to the same extent as software.

Gold ended up, rebounding from a low of US$4,400/oz to close at US$5,100/oz. Silver sold off again, but rallied sharply on Friday from a low of US$64/oz.

The bounce in the USD and a broader risk off move saw a sharp reversal of commodity momentum trades, but any renewal of the USD’s downward trend is likely to see precious metals rebound.

The biggest moves were in Bitcoin, with a sharp rally on Friday (~12%) not enough to offset steep falls earlier in the week.

De-escalation of Iran tensions also sent oil lower, while iron ore fell on high inventories and slowing demand in China ahead of Lunar New Year.

Lithium spodumene also saw a pullback following a string of Australian producers announcing plans to restart idled production.

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Find out more about Focus Australian Share Fund

Contact a Pendal key account manager here

Emerging markets have surged over the past year, with broad-based strength across regions and sectors. Pendal’s Global Emerging Markets Opportunities team outlines the drivers that could see this momentum continue

• EM strength is broad and not just tech driven
• History and fundamentals suggest the rally can continue
• Find out about Pendal Global Emerging Markets Opportunities Fund

JUST under a year ago we wrote that “the global economic and political environment remains volatile; but if we were asked what an emerging markets bull market looks like, we would say it looks like this”.

In the 11 months since then, the MSCI EM Index has returned 42.9% (in USD terms), compared with 21% for MSCI World Index and 17.9% for the S&P 500 index.

The MSCI EM Index captures large and midcap representation across emerging markets countries.

The MSCI World Index captures large and midcap representation across developed markets countries.

Both indices cover about 85% of the free float-adjusted market capitalisation in each country.

We have written extensively about the role of the US dollar in driving emerging economies and financial markets.

In 2025, the dollar was significantly weak in the first half of the year but then strengthened against other global currencies in the second half of the year.

That move, combined with a seemingly less volatile US policy environment, has led to questions about what 2026 might bring.

Here we highlight a few observations about the emerging market rally:

It’s not just AI and semiconductors

Undoubtedly this is a substantial part of the much higher returns in the last year –including extremely strong returns from leading semi names in Taiwan and Korea.

This has plenty of potential to continue, given tightness in supply-demand balances in foundry and memory. We retain substantial exposure to these industries in Pendal Global Emerging Markets Opportunities Fund.

However, this is a broad-based emerging market rally.

MSCI Latin America returned 63.9% in those 11 months, MSCI South Africa returned 76.6% and MSCI Eastern Europe 61.1%.

This looks like previous EM rallies

The kinds of markets and stocks that have led previous rallies are generally performing well.

Current-account-deficit commodity markets (Latin America, South Africa) which have done well in previous up-cycles are again performing very strongly.

Higher-beta markets within the more defensive current account surplus markets are outperforming: MSCI UAE +27.6% v MSCI Saudi Arabia +4.0%; MSCI Korea +138.7% v MSCI Taiwan +57.8% (last 11 months in USD terms).

As before, capital-markets-focused businesses in EM – such as exchanges, investment banks, brokerages, life insurers and asset managers – are generally seeing very strong growth in their revenues and profits from increased volumes and activity.

EM bull markets have historically lasted a long time

Asian equities (which were what EM mostly consisted of then) performed very strongly during the US dollar weakness from September 1985 to December 1988.

Emerging markets performed very strongly during the US dollar weakness from May 2002 to May 2008 and again from March 2009 to May 2013.

The US dollar began to decline, and emerging market equities to outperform their developed market counterparts, only a year ago.

The dollar, relative equity valuations, capital flows and history all suggest that there is plenty of room to run.

We don’t build our portfolio from a directional call, but we are aware of the history of the asset class, and our process leads us to prefer parts of the asset class that both should do well and are doing well.

We remain heavily overweight Latin American markets, with a preference for Brazil and Mexico, and are overweight South Africa and the UAE.

We have substantial exposure to capital markets-focused stocks that are benefitting from a reorientation of savings and financial activity towards emerging markets.

We are also significantly exposed to gold and semiconductors. We find much opportunity in the asset class at this time.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne, Ada Chan and Roshni Bolton are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams

• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

THE announcement of the new US Federal Reserve Chair last Friday led to a sharp reversal in the previously relentless rise of metals such as silver and gold, while the US dollar bounced off recent lows.

Oil continued its rise on increasing geopolitical risks and Treasury yields were relatively muted in their response.

Global equity markets were relatively flat (S&P 500 +0.35%), with most of the price action occurring in FX and commodity markets.

The Fed maintained rates, as expected, despite a couple of dissenting votes.

The statement and Chairman Jerome Powell’s comments were generally more upbeat on the job market and overall economy, with the current monetary policy settings being described as broadly neutral.

In Australia, December Consumer Price Index (CPI) data surprised to the upside and strengthened the case for the Reserve Bank of Australia (RBA) to begin raising rates at its meeting this week.

Australian equities were similarly flat to their international peers (S&P/ASX 300 -0.02%) however mid (-2.17%) and small caps (-3.08%) were weaker, partially reversing their strong start to 2026.

At a sector level, the Technology sector (-6.61%) was again weaker while Energy (+4.19%) stocks followed their underlying commodities higher.

Macro and policy Australia

Following the strong labour force numbers published on 22^nd of January, all eyes were on the December CPI release in order to give a better understanding of the RBA’s likely course of action.

This CPI release was the first to include both the full monthly and quarterly CPI data series. Most analysts and the RBA continue to focus on the quarterly data series for the time being, due to concerns on volatility and seasonal adjustments for the monthly series.

The fourth quarter headline CPI rose by 0.6% quarter on quarter and the annual rate was up 3.6% year on year (consensus 3.2%). The monthly CPI was 1.0% month on month and 3.8% year on year (consensus 3.2%).

The RBA’s preferred measure, the quarterly trimmed mean, gained 0.9% quarter on quarter and 3.4% year on year, which was above the consensus of 3.2%.

Importantly, the RBA’s most recent published forecast for this measure in the November Statement of Monetary Policy (SOMP) was only at 3.2% year on year. The RBA’s stated object for this measure is a target band of 2-3%.

This print was significant because as recently as the August 2025 SOMP, the RBA had forecast a slowing in this measure to 2.6% year on year – so this latest measure is a substantial upside surprise to its forecasts from only a few months ago.

Diving into the CPI components provided something for both the hawks and doves, especially with the mix of both monthly and quarterly data points.

One of the key drivers of inflation has been increasing housing and this was still strong on the year (+5.5%) but rising only 0.1% for the month of December.

Another key driver was electricity costs – rising over 20% for the year with the end of state-based electricity rebates.

Other strong increases were seen in international holidays and motor vehicle prices.

Governor Michele Bullock explicitly mentioned a focus on the housing, market services (excluding travel), and durable goods groups components of CPI.

She has also previously called out “sticky” services inflation – and this remained the case in this release.

There is a divergence in market views on the RBA’s response to this and other recent economic data.

However, pricing quickly moved to a 70% probability of a rate increase at the RBA’s meeting on 2^nd to 3^rd of February.  

A total of two rate hikes is now factored in by the second half of 2026.

The case for the RBA to maintain a “Hawkish hold” includes:

• The quarterly trimmed mean was only a +0.1% surprise relative to the RBA’s most recent forecast.
• The monthly components indicated a slowing in momentum of key categories of housing and market services.
• The rising AUD provides a deflationary boost particularly via cheaper import pricing.
• By raising rates, the RBA would effectively be admitting the three rate cuts of 2025 were at least a partial mistake.

The case for the RBA to raise include:

• Overall, inflation remains too high with both headline and trimmed being well above the 2-3% band.
• The inflation impulse is accelerating, with two-quarter trimmed mean run-rating at 3.9% annualised.
• Inflation is now broad based – the share of items with inflation annualising above 2.5% is now 60%.
• The RBA may have to make a “triple upgrade” for each of inflation, GDP and labour market at the February meeting.
• The RBA’s 30-year inflation credibility is now at stake, especially in an expansionary fiscal environment.

Other data points released during the week included the Producer Price Index (PPI), showing a 0.8% rise in the quarter and 3.5% annually.

This, like the CPI, showed the inflationary pressures currently in the economy.

Also, the NAB Business conditions and confidence survey rebounded in December with most components suggesting solid momentum in the economy coming into the year-end.

Macro and policy US

FOMC Rate decision

The Federal Open Market Committee (FOMC) maintained the mid-point of the target range for the funds rate at 3.625%, as widely expected.

The vote was 10-2 with only Fed Governors Stephen Miran and Christopher Waller dissenting in favour of a 25-basis-point (bp) rate reduction.

As discussed previously, Miran is US President Donald Trump’s chosen temporary appointee while Waller’s vote was seen as a pre-requisite for him to remain in the running for the Fed Chair role.

The FOMC statement itself contained more upbeat language, noting “economic activity has been expanding at a solid pace” (previously moderate) and while “job gains have remained low,” (previously slowed), “…the unemployment rate has shown some signs of stabilisation.”

Significantly, previous commentary on the downside risks to employment were dropped from this statement.

In the subsequent press conference, Fed Chair Powell commented that the outlook for economic activity has improved since the last meeting.

He also noted that most of the excess core inflation looked to be related to tariffs and his belief was that these effects should fade over time.

Overall, he stated that his assessment was the current Fed policy rate was within plausible estimates of neutral (though maybe at the higher end of that range).

Fed watchers took that statement and press conference to mean that Chairman Powell had delivered his last rate cut before his term expires in May 2026.

The market is now only pricing one Fed rate cut by mid-year, with just under two cuts in total priced by the end of calendar 2026.

Federal Reserve Chair candidate

After months of commentary and speculation, President Trump provided a surprise both in terms of timing and eventual final nominee for the Federal Reserve Chairmanship, announcing that he would put forward former Fed official and economist Kevin Warsh.

Kevin Warsh’s background summary:

• Graduate of Stanford University and Harvard Law School.
• Investment Banking expertise: 1995-2002 at Morgan Stanley.
• Public policy experience: President George W Bush appointed him as special assistant to the president for economic policy and as executive secretary at the National Economic Council.
• Federal Reserve experience: Fed’s Board of Governors from 2006 to 2011.

The market immediately moved to factor in implications of this nomination, versus the other favoured candidates.

While for the last year Warsh has consistently argued that rates should come down – a somewhat necessary stance for candidature given Trump’s statements – he has historically been viewed more as a policy hawk compared to the other Fed chair candidates.

This stems from his previous time as Fed governor during and post-GFC, when he argued that higher rates were needed to kill off sticky inflation even as unemployment was rising.

However, Warsh has recently argued a couple of interesting points, such as:

• The justification for lower rates is that the artificial intelligence revolution is set to unleash a wave of productivity growth that will ultimately be deflationary for the economy.
• The Federal Reserve itself requires significant changes, including reducing the size of its balance sheet and rethinking economic models it currently relies upon.

The move to reduce the Fed balance sheet may lead to higher rates as the Fed reduces its stock of Treasuries – but one potential offset is capital reforms to the banking system to encourage Treasury holdings.

Overall, Fed observers view Warsh as an experienced official who is well credential and pragmatic in his approach, while also quelling any fears about the independence of the central bank.

Any sudden changes to policy will likely be tempered by Warsh taking Miran’s temporary seat and then needing to convince the rest of the voting members.

Markets responded to the announcement in slightly hawkish terms with rates a touch higher, a steeper yield curve, and stock futures lower.

The Warsh announcement also helped to support the dollar by reducing fears of debasement and extended dollar weakness, which led to gold and silver moving sharply lower.

Other economic data

Other data release during the week included:

• Durable goods orders rose 5.3% in November versus consensus at 4.0%, but this was boosted by volatile aircraft orders.
• Consumer Confidence: The Conference Board index dropped to 84.5 in January, the lowest level since May 2014.
• Initial jobless claims dipped to 209,000 from 210,000 while continuing claims fell to 1.827 million.
• Headline PPI rose by 0.5% in December, versus consensus of 0.2%, and core PPI increased by 0.7% versus consensus of 0.2%.

Overall, these continued recent trends in data point to a patchy US consumer but a steady jobs market while the effects of tariffs work their way through the economy

Markets

Overall market sentiment remains elevated, with many indicators – such as ETF flows, put/call and bull/bear ratios – being close to recent highs

US equities finished up 1.5% for January. This has historically correlated with superior returns for the rest of the calendar year, relative to those years beginning with a negative January return.

Microsoft was down 12% on fears of slowing growth for its cloud computing software and questions about the returns from its significant OpenAI investments.

Meta, on the other hand, rose 10% driven by positive AI developments boosting user engagement and ad revenue.

Apple was flat despite reporting net sales rising 16% and the company struggling to source enough chips to meet its customers’ iPhone demands.

Commodities and FX Volatility

We saw extraordinary volatility in commodities, especially precious metals.

In the US, the iShares Silver Trust (SLV) was among the most-traded securities by volume last week, behind only the SPDR S&P 500 and Invesco QQQ Trust, and ahead of Nvidia, Tesla and Microsoft.

Gold hit another all-time high of $5,500/oz mid-week, having only crossed $5,000 on Monday, $4,000 in October 2025 and the $3,000 level in March 2026.

However, the nomination of Warsh as Fed Chair triggered a sharp sell-off on Friday, with gold down 9%, silver down over 25% (the worst day since 1980) and platinum down 17%.

Market observers stated that the stronger dollar and leveraged positions/margin calls exacerbated the moves.

Prior to these moves, the strength in gold has seen the gold mining sector reach 6.4% of the S&P/ASX 200, putting it in-line with major sectors such as Healthcare, Real Estate, Industrials and Consumer Discretionary while being substantially larger than five of the smaller GICS sectors.

Energy added to its strong start in 2026, with Brent crude reaching six-month highs as investors monitor US-Iran tensions.

The US dollar trade-weighted index (DXY) started the week softer on fears of intervention to support the Japanese Yen but ended higher on Friday.

Meanwhile, the AUD continued its strong run, cracking the 70 US cents level for the first time since early 2023.

Another area to watch is the reduction in Australian Investment Grade credit spreads to the lowest level since 2022. This helps at least partially offset the rise in Australian Government bond levels for borrowing costs.

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About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

Part of Perpetual Group, Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Inflation is higher than the RBA would like, but does it mean a rate hike is a certainty? Pendal’s head of government bond strategies TIM HEXT explains what it means for investors

• Find out about Pendal Government Bond Fund
• Browse Pendal’s fixed interest funds

IF THE Reserve Bank was hoping for inflation data that gave a clear reason to hike or to stay put, they did not get it this week. 

The final result for the December quarter trimmed mean (underlying) CPI was 0.9% for the quarter and 3.4% for the year.

Headline was 0.6% for the quarter and 3.5% for the year.

On its own, this should be reason for an RBA hike. These numbers are clearly above the 2-3% target range and 0.2% above the year-end forecasts back in early November.

Combined with a recent pick up in employment and consumer spending it suggests an economy at or near capacity.

The market agrees and now has a 70% chance of a February hike and economists’ predictions are divided in a similar way. (Bonds, however, had a small rally as the urgency for successive hikes was not there. )

But , if the RBA was disposed to more caution, the argument goes that inflation has moderated from the third quarter to the fourth quarter and is likely to continue to do so.

Our early call is for Q1 trimmed mean to be nearer 0.8%.  Hiking rates now would risk a welcome recovery in consumer spending and growth.

This will make for robust discussion at next week’s RBA board meeting, perhaps revealing the balance of “hawks and doves”.

(While we will see the board’s voting numbers — and potentially another split vote — we do not get to see individual votes.)

What did the inflation numbers show?

The Good 

In December the pressure areas of housing — rents and dwellings — only went up by 0.2%.

These have averaged nearer 0.4% for the second half of 2025. Overall they remain above 4% for the annual growth but this result was encouraging. 

A number of consumer items showed some deflation. Clothing and footwear, plus furniture and equipment fell, bucking the unusually higher numbers of the last six months. 

The OK 

Electricity prices are now flat. All the subsidy noise of the last 12 months are now out of the system.  

Fuel prices were slightly up but overall prices are largely flatlining. 

Health prices actually fell but this was another government policy led item as the government attempted to increase bulk billing. Health will remain a key problem area and grow above 4% in the year ahead. 

The Ugly 

Travel prices are booming.

They grew 16% in December, but that is partly seasonality. Over the quarter they were up 4.6%. Domestic travel was up 9.6% from a year ago, although maybe the Ashes boosted that somewhat.  

Key problem areas for inflation

The three key pressure points for inflation remain housing, health and education.

Between them they are around 35% of the CPI basket and they are all running above 4%. 

Health and education are largely wages driven, though some private schools seem determined to increase by more than wages.

Housing is a well-known structural story that may gain some medium-term relief from slower population growth. 

We will be keeping a close eye on upcoming wage agreements, including the Minimum Wage decision (due in June) to see if the recent spike in inflation feeds back into wages.

This is key — not for whether the RBA goes in February, but whether cash rates are closer to 3% or 5% in the medium term.

Is there any good news ?

The good news is that while inflation will be sticky above 3% for most of this year, it’s far more likely medium term to push back down below 3% than above 4%.

We are not on the brink of another high inflation episode (absent a black swan supply shock or major oil price spike).

The following graph shows that both goods and services have been tracking up nearer 4%.

Even though services will remain sticky, goods prices should track back to closer to their longer-term average of 1%.

With goods one-third of the CPI basket this means service inflation can remain at 4% and overall inflation still be sub 3%.

 CPI Goods and Services components, annual movement (%)

 

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE McKAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Horizon Sustainable Australian Share Fund

THE rotation that emerged in 2H25 has persisted into early 2026, with markets rewarding selective exposure rather than broad beta. 

Index-level resilience continues to be supported by active hedging and disciplined positioning, not a material improvement in macro confidence.

Earnings momentum remains concentrated in resources and gold-exposed names, whilst Technology (specifically software) sentiment has remained under pressure. We are watching for early signs of software stabilisation following some tentative green shoots last week. 

Geopolitics remains at the forefront of markets, with President Trump’s overtures towards Greenland contributing to a sharp rally in gold (+8.5%) and renewed weakness in the US dollar (-1.8%). The S&P 500 returned -0.3% last week.

Domestically, the S&P/ASX 300 fell 0.5%, weighed down by a hotter-than-expected labour print that brought forward RBA tightening expectations. 

Resources were a bright spot with high commodity prices contributing to strong quarterly results.

US policy and macro

Inflation

November US personal consumption expenditures (PCE), a measure of inflation, was in line with expectations.

Core PCE, the Fed’s preferred measure of inflation, rose 0.16% in November, tracking at 2.79% year on year (YoY). 

The trajectory is consistent with a decline back towards the FOMC’s 2% target and the market is pricing in two interest rate cuts in 2026. 

Adjusting for inflation, real consumption expenditures increased by 0.3% in both October and November, again in-line with consensus. 

Consumer spending was surprisingly resilient in 4Q25 with spending on goods holding up despite tariff-related cost impacts. This continues a trend of hardy consumption despite slowing incomes and a loosening labour market, which points to a declining savings rate. 

At some point, very low savings and further slowing income could become a headwind for consistently strong consumption, but we are not there yet. In addition, larger-than-usual tax refunds in early 2026 should be supportive. 

Real GDP growth

The US Bureau of Economic Analysis revised up 3Q GDP by 0.1% to 4.4%. Downward revisions to real spending were roughly offset by upward revisions to business fixed investment. 

Growth drivers were narrow, driven by the upper-income consumer and AI investment.

Jobs

Initial jobless claims increased 200,000 for the week ended 17th January, up from 199,000 but below consensus (209,000). 

Whilst low, this is more a symptom of relatively lower seasonal hiring in 4Q26 (particularly in retail) rather than a sign of a strengthening labour market. 

Davos

There was little new news on the US policy front out of Davos. 

The market was looking for more movement on Trump’s expected policy announcements on housing – for example instructions to Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds to lower mortgage rates, but there was none forthcoming. 

Trump also appeared to walk back proposed 10% tariff increases on several European nations (set to be enforced 1st of February) and announced “a framework of a future deal with respect to Greenland” after talks with Mark Rutte, the Secretary of NATO. This is seen as positive for markets.

Housing

Pending home sales fell 9.3% in December (versus consensus -0.3%), wiping out four months of recovery and surprising the market. 

Poor weather explains some part of this, but a lack of obvious trigger suggests this decline is likely just noise rather than a new sustained trend. 

In contrast, mortgage applications for the week ended 16th of January grew 5.15% to the highest level since December 2023. The 30-year fixed rate mortgage fell 2 basis points (bps) to 6.16% and is down 16bps calendar year to date.

Other data

–             Cold weather in the US from weaker-than-normal Arctic circulation patterns is contributing to a rise in natural gas prices. This may help Macquarie Group’s (MQG) commodities trading business. Cold weather can also crack pipes, possibly providing a tailwind for Reliance Worldwide’s (RWC) plumbing goods.   

–             S&P Manufacturing & Services PMIs were little changed at 51.9 and 52.5 respectively, close to expectations and providing limited incremental insight. 

Australia policy and macro

Australia is one of very few economies expected to see rates rise in 2026, along with Japan and Colombia.

And economic data last week was consistent with tighter monetary policy as employment increased 65,000 month on month in December – versus consensus at +27,000 – while the unemployment rate fell to 4.1%.

The market is now pricing two rate hikes by November, and the Aussie dollar has increased to US$0.68.

Japan

Japanese government bond (JGB) yields dropped 40bps in 48 hours following political manoeuvring and the announcement that the consumption tax on food prices would be abolished to help address inflation concerns. 

The market, fearful that the government would finance this fiscal stimulus via new debt issuance, moved immediately to short JGBs. 

Globally, bonds moved in sympathy as an idiosyncratic Japanese event manifested into broader repricing of global duration risk.

This suggests that fiscal concerns and potential shifts in central bank reactions are risks endemic to economies globally. 

We do note Japan is in a more challenged position with sticky inflation and interest rates well below where they should be for inflation at current levels. 

But that said, a continued normalisation of Japan yields may destabilise global markets, with the pace at which it occurs the issue. So we keep a watching brief on Japan for now. 

Gold

Ongoing geopolitical uncertainty and a softer US dollar have reinforced demand for real assets, with gold extending its rally and Australian gold equities now representing a larger share of the ASX 300 than at any point since the year 2000.

Gold was +8.5% for the week as it rallied towards $5,000/oz, driven by reignited geopolitical tensions as the market digested the implications of Trump’s desire for Greenland. 

The total value of gold held by central banks outside of the US is close to exceeding that of their US Treasury holdings. 

Goldman Sachs raised its December 2026 gold price forecast to $5,400/oz as private sector diversification into gold continues. 

Unlike other commodities where “high prices cure high prices,” gold supply is largely price inelastic with output limited, stable and worth about 1% of global gold stock outstanding. 

Hence, gold rallies tend to reverse when (a) geopolitical risks ease, (b) macro policy risks ease, or (c) the Fed switches from cutting rates (driving ETF inflows) to hiking rates.  In this vein, the current environment looks supportive for the rally to continue. 

Markets 

Market activity remains elevated, but investors continue to manage risk carefully rather than take big directional bets.

US equities were modestly sold last week, mainly through shorting individual stocks, while broader index and ETF positions were reduced without a clear risk-off move.

Even so, overall trading exposure remains elevated, suggesting investors are staying active while keeping net risk contained.

This reflects a clear shift from the post-pandemic market of 2021, when investors ran high net exposure and used shorts mainly as protection.

The inflation shock and rate tightening in 2022 forced a reset, and since then markets have been driven by stock selection and rotation rather than broad beta.

While directional exposure has edged up recently, it remains well below prior peaks, indicating confidence is rebuilding only cautiously and alongside ongoing risk controls.

Market breadth has improved in the US, creating more opportunities beyond the largest stocks.

Small shifts out of the S&P 500 are having an outsized impact elsewhere, with flows into smaller companies supporting Russell 2000 performance year to date.

A similar pattern is evident in Australia, where small caps, led by Resources, have materially outperformed the large-cap end of the market.

Sector rotation continues to do the heavy lifting.

Technology remains the most sold area in US markets, particularly Software, while Semiconductors have attracted buying.

Energy has seen a sharp turnaround, driven by short covering as prices strengthened, and flows into Consumer and Health Care stocks point to growing emphasis on company-specific earnings outcomes rather than macro themes.

Derivatives markets tell a similar story. Periodic volatility spikes continue to fade quickly, making it cheap to hedge the market overall, even as individual stocks remain volatile.

Investors are therefore protecting portfolios at the index level while taking risk in selected stocks and sectors.

Small caps have joined the rotation, but interest remains tactical rather than high conviction, with many investors preferring to trade volatility rather than commit capital outright.

Overall, the positioning and rotation dynamics that emerged in late 2025 remain firmly in place.

Markets continue to look stable at the index level, but risk and opportunity are increasingly concentrated beneath the surface, favouring selective exposure and active risk management over broad, directional positioning.

Australian equities

In Australia, factor performance continues to point to a market driven more by selective exposure than broad macro conviction.

Growth and momentum outperformed again last week, supported by strong contributions from the Materials sector, while value-oriented styles lagged, led by weakness in dividend yield and net buyback yield factors.

Low volatility also underperformed for a second consecutive week, suggesting investors remain willing to tolerate volatility in pursuit of upside rather than rotating defensively.

The backdrop continues to favour Materials relative to Financials, reflecting investor preference for globally linked earnings and inflation protection over domestic income-sensitive exposures.

Overall, the pattern suggests that the rotation which emerged in the second half of 2025 remains intact and has carried through into the early part of 2026, rather than showing signs of exhaustion.

Commodity prices continue to drive upgrades for Materials across the ASX. At spot prices, most resources companies would see further upgrades to earnings. 

In contrast to Materials, Information Technology has seen the largest negative earnings revisions over the past 12 months. 

Software sentiment meaningfully deteriorated over the past year as the market questions AI’s impact on software business models (e.g. seat-based pricing, barriers to entry on product development, terminal growth rate concerns). 

In Australia, this has been exacerbated by dilutive M&A (Xero) and corporate governance failures (WTC).   

Software is now the most over-sold level it has ever been based on a 14-day relative strength index (RSI) indicator.

We have been looking for a sign of stabilisation or sentiment bottoming, are we finally there?

Last week did see some interest returning to the sector with specialist software PE fund, Thoma Bravo, highlighting value on offer in the Financial Times, while there was some institutional buying in US software on Thursday and Friday and on the ASX on Friday. 

A positive trading update from Life 360 (360) in Australia helped locally. 

Evercore has highlighted the potential for a bounce, noting the iShares Expanded Tech-Software Sector ETF has bounced off its current technical level five times in 15 years, with one exception (the 2022 bear market).

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

Residential and commercial real estate in Australia continues to be undersupplied, which makes this a sector to watch in 2026, according to JULIA FORREST, co-portfolio manager of Pendal’s Property Securities Fund.

• Construction costs hamper new property builds
• Retail and affordable residential favoured in 2026
• Find out more about the Pendal Property Securities Fund

The cost of construction spiked 40 per cent between 2019 and 2024 and that is a trend that continued throughout 2025.

“It’s uneconomic to build new assets. It’s very difficult to make a new development stack up,” says Forrest.

“So that puts the sector in a good light in terms of rental growth going forward, because you don’t have a big supply pipeline.”

With the anticipated shift from interest rate cuts to hikes this year coupled with the tight property supply pipeline, rental growth looks intact.

“Construction costs historically have never ever gone down. Labour costs are locked in at between 4 and 5 per cent growth, and materials, which are half of the cost, are probably going to go up with CPI,” explains Forrest.

“So construction costs won’t go backwards. If anything, they’re going to continue to rise.”

Population growth and job security are also anticipated to be solid this year.

This is a positive for predicted earnings growth in 2026, which Forrest views as “pretty strong”.

“Prospectively, earnings growth is somewhere between 4 and 6 per cent in the next year, which is around the same as the All Industrials,” she says.

“Given that real estate is locked in through long-term leases, you don’t have the same risk in terms of that earnings growth profile.”

“So we are expecting a good return for 2026 – values have dropped, rental growth looks intact, and the supply pipeline continues to be very muted.”

Pendal’s REIT portfolio comprises established assets as well as development assets, including shopping centres, office, industrial, residential development, petrol stations, pubs and storage.

“In terms of our positioning, we like retail real estate. This includes convenience-based retail, such as discretionary malls, but we also like affordable residential or retirement properties,” says Forrest.

“Most listed Real Estate Investment Trusts have very high-quality assets, so if equity investors continue to ignore the sector, then you’ll have other investors that will buy it.”

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Here are the main factors driving the ASX this week according to Pendal portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

Geopolitics continues to dominate, with the focus shifting from Venezuela to Iran and Greenland. 

Threats of US intervention saw a sharp oil price rally early last week, which tempered as the Trump administration indicated military action was not the primary strategy, for now. 

Instead, President Trump flagged 25% tariffs on countries doing business with Iran – though the market impact was muted, reflecting a high degree of tariff fatigue.  

Trade sanctions also form part of increased pressure around US efforts to purchase Greenland, with Trump threatening a 10% tariff on European countries opposed to the acquisition.  

The US Supreme Court had been expected to rule on the legality of tariffs deployed under the International Emergency Economic Powers Act the week before last, but is yet to do so. There is no indication of the reason behind the delay. 

Elsewhere, the Trump administration’s suggestion that credit card interest rates be capped at 10% was poorly received in the US banking and payments space.  

The market continues to price in 48bp of interest rate cuts for the US in 2026, with the next cut in June – which would be the first meeting for the new Federal Reserve chair.  

Outside of oil (Brent crude +1.2%) and gold (+2.2%), commodity prices were a touch softer for the week. However they remain elevated after recent strength and miners continue to be very well bid across the spectrum. 

This drove a 3.5% gain in the domestic resources sector last week, which helped the S&P/ASX 300 to a 2.1% return versus a 0.4% decline in the S&P 500. 

Breadth in the latter continues to improve, with the small-cap Russell 2000 index beating the S&P500 for the 11th straight session last week – the longest such stretch since 1990. 

It is early days for Q4 reporting season in the US.  

Several of the banks – a bellwether for the economy – reported without hoisting any red flags. They talked to cost growth, but bad debts remaining benign, which gave the market some comfort. 

Expectations for US Q425 earnings remain at a touch over 8% and haven’t really moved much over the quarter.  

The bottom line? The US economy remains in pretty good shape, notwithstanding a weakening labour market, with the prospect of some front-loaded impetus for growth in 2026.  

Macro and policy US  

Inflation 

There was nothing much to see in the December consumer price index (CPI) release. 

Headline CPI rose 0.31% month-on-month and +2.68% year-on-year, which was largely in line with expectations. 

The core measure rose 0.24% and 2.64% year-on-year, likewise as per the median forecast.   

Some of the stronger components such as airfares, hotels and clothing were related to a rebound following previous distortions due to data collection during the government shutdown.  

This also saw a rebound in rent and owner’s equivalent rent. 

The key observation is that inflation started in 2025 at 3% and ended largely unchanged in the last two months at 2.7%, notwithstanding all the fears around how tariffs would manifest in prices throughout the course of 2025. 

Housing 

There were sales of 4.35m existing homes in December, up from 4.14m in November and ahead of the 4.22m expected by consensus. 

A drop in mortgage interest rates earlier in the year continued to support sales – and December’s result was the largest in almost three years. 

That said, a recent stabilisation in mortgage rates may mean the recovery in home sales may ease in the near term. 

The US administration is acutely focused on the housing sector.  

A key issue is that the 30-year conventional mortgage rate remains stuck at 6%, while the average rate on outstanding mortgages is around 4%.  

This gap has remained wide since 2022. That’s in contrast to the prior ten years, when the average outstanding rate was usually lower than the 30-year mortgage rate. 

The administration is taking a broad-brushed approach to address affordability issues and thaw the housing market, given that mortgage rates have been much stickier than expected.  

Examples of the ideas being floated include:  

• Restricting private equity purchases of homes  
• Creating a 50-year mortgage  
• Mortgage portability from home to home  
• Slow walking federal funds unless local areas change restrictive codes  
• Allow building on federal land  
• Rent control  
• Tax incentives to bring down mortgage rates, perhaps temporarily  
• Banning share buybacks for homebuilders  
• Increase national timber production  
• Fannie Mae and Freddie Mac purchasing $200 billion of mortgage-backed securities  
• A tax credit for homeownership 

A lot of the rhetoric is pie-in-the-sky and hard to see happening.  

However the key observation is that the Trump administration is focused on addressing this issue and it remains one to watch. 

Retail sales 

Retail sales rose 0.6% in November, which was a touch above the 0.5% expected by consensus. Net revisions were -0.2% to October. 

Sales were up 0.5% (excluding autos), which was also slightly above the consensus expectation of 0.4%. Net revisions were likewise -0.2%. 

The producer price index (PPI) for core goods has seen a strong rise in October and November and was running at 3.3% annually for the latter.  

This is the highest rate since April 2023 and comes on the back of the tariff impact. 

However goods prices in the CPI have only risen 0.1% between September and December 2025, suggesting retailers have been absorbing this increase in the cost of goods.  

The degree to which this is being felt in margins, or offset by savings elsewhere in the business, will be a key issue to watch this reporting season. 

Employment 

Initial jobless claims fell from 207K to 198K in the week ending January 10. This was below consensus expectations of 215K.  

Continuing claims fell from 1,903K to 1,884K in the week ending January 3, which was also below consensus at 1,897K.  

Interestingly the unemployment rate has climbed at the same time that initial and continuing claims have fallen.  

This suggests new entrants to the labour market – who do not qualify for benefits – are finding it difficult to get a job in an environment of very low hiring activity. 

Monetary policy 

Fed Governor Stephen Miran, appointed to the board in September, noted that inflation was “very much headed in the right direction”. Elements such as housing costs would push inflation lower and political discussions around Fed independence were “just noise”. 

Others demurred and pushed back against the argument for imminent rate cuts, noting risks of a freefall in the labour market had subsided. 

• Chicago Fed President Austan Goolsbee noted that his concerns about an employment crash had been allayed in recent months and he was “comfortable that this is a stabilisation of the job market at a full-employment-like level”. He also noted inflation would come “roaring back if you try to take away the independence of the central bank”.  
• Philadelphia Fed President Anna Paulson stated her wish for “monetary policy restrictiveness” to help get inflation back to 2%. She saw the prospect of rate cuts later in the year, but only after validation that price pressures were easing or if the job market started to deteriorate unexpectedly. 
• Kansas Fed President Jeffrey Schmid saw little point in cutting rates with the economy “showing momentum and inflation that is too hot”. He noted the labour market had cooled, but this was necessary to keep the outlook for inflation in check. 

The majority opinion seems to be that current rates are about where they need to be. 

The Fed remains focused on the labour market, but data is suggesting that previous weakness is not leading into a severe downturn. 

Macro and policy Australia 

The Australian Bureau of Statistics Household Spending Indicator beat expectations by a handy margin for the second consecutive month. 

It rose 1% in November, versus consensus at 0.6%. This comes after a 1.4% gain in November, ahead of 0.6% expected. 

This takes annual spending growth to 6.3%, up from 5.7% in October and the fastest pace since June 2023. 

Spending has accelerated to 11.3% over three months and 7.4% over six months in annualised terms. 

Compositionally, monthly spending increased in both goods (0.9%) and services (1.2%).  

Discretionary spending was up 1.2%, after a 1.7% gain in October. Annual growth in discretionary spending has lifted to 6.1 per cent, the highest rate of growth since mid-2023. 

Gains were also broad-based across states. Tasmania (+2.1%) and Western Australia (+1.7%) led, but there were also sizeable gains in the larger states of NSW (+0.8%) and VIC (+1%). 

That said, there are clouds on the horizon.  

Australian consumer sentiment declined 1.7% to 92.9 in January, remaining in pessimistic territory.  

The report noted the “main catalyst continues to be a sharp turn in interest rate expectations”, with nearly two-thirds of consumers now expecting mortgage rates to move higher over the next 12 months. 

Australian consumer inflation expectations have risen since November and remain elevated in January.  

Central bankers care a lot about consumer inflation expectations as it can bleed into wage growth expectations. 

Markets 

US reporting season 

US Q4 reporting season has started well, though it is very early days with only 7% of the S&P 500 reporting so far. 

Of these, 79% have beaten EPS expectations, which is in-line with the yearly average and a touch above the five-year average of 78%. 

Two-thirds have surpassed consensus sales expectations, below the 71% one-year average and the five-year average of 70%. 

In aggregate, companies are reporting earnings that are 5.8% above expectations, versus a 7.4% one-year average positive surprise rate and the 7.7% five-year average.  

The blended expected earnings growth rate for Q4 S&P 500 EPS currently stands at 8.2%, versus 8.3% at the end of Q3. 

The blended expected revenue growth rate is 7.8%.  

Thus far, companies are reporting sales that are 0.3% above expectations, below the 1.3% one-year positive surprise rate and the five-year average of 2.0%. 

Australia 

Eighteen ASX 200 companies hit 12-month highs on Thursday, of which 17 were mining or mining services providers.  

Higher-than-expected commodity prices are driving the outperformance of resource stocks, with a quarter of the Materials sector’s 40% gain over the past six months occurring in just the past two weeks. 

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About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

 

 

 

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Jonathan Choong

• Find out about Pendal Focus Australian Share fund

THE first full week of 2026 was eventful. Geopolitical events in Venezuela and Iran created volatility in commodities, US macro data finally came through post-shutdown, and the RBA eased concerns of a near-term rate hike along with some large M&A developments.

Equity markets were strong outside of Australia, with most predictions for another good year with strong liquidity driving sentiment.

Commodities were up, with concerns over potential oil supply disruption leading to a bounce in crude. Gold was also up on geopolitical uncertainty and base metals and lithium lifted on improved global-growth expectations.

The US market is up calendar year to date (CYTD) with the S&P 500 returning 1.8%, led by more cyclical sectors metals, homebuilders and semiconductors. Software, REITs and the Mag 7 lagged.

The Australian market started the year flat, with the S&P/ASX 300 up only 0.1% CYTD. Resources outperformed yet were held back by banks and tech. Corporate activity also materialised with SGH bidding alongside Steel Dynamics for BlueScope Steel, which was rejected, and Rio Tinto entertaining a merger with Glencore.

Geopolitics

In trying to understand the implications of geopolitical developments, often there is too much emphasis put on the market consequences of these events.

For equities, unless there is a clear impact on global growth or corporate earnings, the default response is to wait and assess how conditions develop.

Most of the recent reaction to events in Venezuela and Iran were seen in commodities, with gold benefitting from a further rise in risk premiums.

Oil is also a focus with both the Venezuelan and Iranian situations potentially having material consequences, these are ambiguous and could go either way.

Venezuela, Iran and the oil market

Venezuela currently produces around 800,000 barrels per day and could add a further 400,000 in the coming months, which would return output to September levels. Most of the recent decline reflects the tanker blockade.

There is ongoing debate around Venezuela’s potential incremental supply. The consensus view is that capacity is limited over a three-year window due to underinvestment and operational constraints, implying an additional 300-400,000 barrels at most.

However, there is an alternative perspective from some in the US oil industry that production could rise to 2-3 million barrels per day over that period – an incremental 800,000-1.8 million barrels. An additional 1 million barrels are estimated to reduce the oil price by roughly US$8, which could be a medium-term headwind, yet this hasn’t showed up in the forward curve yet.

A more cautious factor for pricing is the increasing influence of the US. When combining US reserves with those of Venezuela and Guyana, the bloc now holds sway over more than 30% of global reserves, compared with Saudi Arabia’s 14%. This could allow the US to exert greater long-term control over oil prices.

The view is that they would guide pricing into the mid to high US$50s, as this ensures US shale remains profitable (breakeven in the high US$40s) but low enough to allay concerns on cost of living in the US. This may put them at odds with OPEC.

When it comes to achieving this production growth, US companies will have to lead with material capital expenditures ($50-100 billion) and there are three criteria for investment:

1. Security: Around 500,000 militia linked to Russia, Iran and Cuba operate within Venezuela. The view is these groups must exit the country before capital is deployed and the blockade is lifted.
2. Elections + stable government: The interim President is liked by the oil industry, but free elections may take longer than expected. This is partly because of the foreign militia and the Colectivos, which are armed Maduro loyalists who ride around on motorcycles with guns repressing dissent, making credible elections unlikely while they remain active. The formal Venezuelan opposition also appears to lack US backing.
3. Contracts terms: For companies that have been burnt before in Venezuela, they will need watertight contract terms before coming to the table.

If these conditions are met, the consensus view is that capital availability is not seen as a major constraint. The US government has indicated it may support investment to facilitate development.

There are concerns that the near-term effects may lead to some disruption to oil supply, specifically with the focus on stopping tankers which are flouting the blockade. This also runs the risk of escalating tensions particularly where Russian entities are involved.

Protests and unrest in Iran introduce another source of uncertainty for the oil market. While the direction of impact remains unclear, outcomes cut both ways – production could be interrupted, or the government could increase exports to bolster the economy.

US macro and policy

Labour data

Overall, the consensus view is that the recession risk in the US economy is receding and that the market is expecting an acceleration of growth.

This week there was a variety of labour market data which overall was mixed but did little to shift rate expectations.

December payrolls came in lower than expected at 50,000 versus 70,000 forecast, with private payrolls at 37,000 versus 75,000. November was revised down by 8,000 to 56,000 and October by 68,000 to 179,000.

The three-month average is now -22,000 from -3,000 in November and +22,000 previously. Adjusted for shutdown distortions, underlying payroll growth is estimated at 11,000, which is below the breakeven level to stabilise the unemployment rate.

The softer data explains Powell’s recent comments that payrolls may be overstated by about 60,000 per month. The inference here is that the data is not worse than the Fed expected.

The unemployment rate declined to 4.38% from 4.54% and below the 4.5% forecast, supported by a 232,000 increase in the labour force.

Average hourly earnings rose 0.33% month on month versus 0.3% expected and are up 3.76% year on year (y/y). Average weekly hours fell 0.1 year on year, placing underlying wage growth at 3.5% y/y.

Despite the worse payroll data, the fall in the unemployment rate was the signal the market put most weight on, with it reducing the likelihood of a Fed cut.

JOLTS job openings for November were weaker than forecast at 7.15 million versus 7.65 million and contradict other jobs data signals from sources such as from Indeed. The true direction of the labour market remains uncertain. The jobs worker gap has now fallen below 0, indicating limited wage pressure risk from the Fed’s perspective.

The hiring rate fell 0.2 percentage points (ppt) to 3.2%, layoffs declined 0.1ppt to 1.1%, and the quits rate rose slightly to 2.0%. Jobless and continuing claims remain broadly sideways, signalling no meaningful deterioration.

The overall conclusion is US companies are managing their cost structures through restricting hiring and limiting wage growth rather than shedding labour.

One consequence is that unemployment in young people is slowly rising due to a lack of job opportunities and this is not fully captured in the data.

Housing

Housing policy again featured in recent posts from President Trump, emphasising affordability.

The first proposal was a ban on institutional purchases of residential property, although institutions are estimated to own only 2-3% of rental housing stock.

The second was a proposal for Fannie and Freddie Mac to use their $200 billion cash to buy back mortgage bonds to drive down spreads and therefore reduce mortgage rates. This is a process that has already been happening and is unclear if it would have a material impact.

The broader affordability challenge still remains structural, and there is little the administration can do to meaningfully address supply constraints at this stage.

Productivity

The other impact of companies restricting hiring and limiting wage growth is higher productivity. Q3 productivity rose 4.9% annualised, lifting the 12-month rate from 1.3% to 1.9%.

In our view the reacceleration in productivity does not relate to AI directly. It is rather companies squeezing more out of their business as higher uncertainty makes them reluctant to commit to longer term investments, including labour hiring.

Historically, productivity slowed after the GFC to about 1.4%, following the strong 1995-2005 period. The recent improvement suggests the economy can sustain higher growth at lower interest rates – a constructive backdrop for earnings and valuations.

Market bulls argue AI could underpin an extended period of productivity gains, keeping trend growth in the low 2% range.

The other implication of higher productivity and constrained wage growth is that US corporates continue to increase the profit share in the overall economy, the corollary of this is a decline in labour’s share, which does have political consequences but remains supportive for margins.

Elsewhere, the Atlanta Fed GDPNow tracker surged to an estimated 5.1% Q4 GDP growth, well above the 0.9% consensus. The move was driven by trade data showing a sharp drop in the current account deficit, although this looks anomalous and may be tied to stockpiling ahead of tariffs being unwound.

The US ISM services index for December also rose 1.8 points to 54.4 versus 52.2 expected, the highest level since October 2024. Strength came from business activity, new orders and employment.

Overall, market consensus expects US GDP growth to be 2.1% in 2026. Given current economic momentum – supported by lower rates, ongoing fiscal support, continued AI related investment, improved trade dynamics and a pickup in private sector capex – we see upside risk to forecasts, with growth potentially exceeding 2.5%.

Equity markets are moving in this direction, which explains the strong start to the year and the rotation to cyclicals.

Australia macro and policy

Australia’s November monthly CPI came in softer than expected, with headline inflation at 3.4% versus the 3.6% forecast. The number was helped by seasonal discounting in clothing and travel.

The monthly trimmed mean number was also in line at 3.2% year on year. Given this is still early days for the data set, the RBA is putting more emphasis on the upcoming Q4 quarterly print, releasing on 28th January. Both the market and RBA expecting 0.8% quarter on quarter.

There are different perspectives on the underlying trends. Hawks argue that stripping out volatile components shows inflation pressures remain elevated.

Housing related categories remain firm, with rents running at a 4.8% annualised pace and construction costs at 6.2% on a three-month annualised basis.

Market services, including restaurants, insurance and car maintenance, also remain sticky. This could see the Q4 trimmed mean land between 0.9% and 1.0%, potentially keeping a February hike on the table.

Late in the week, Deputy Governor Hauser signalled the RBA may be seeking flexibility to avoid a move on 3 February, noting that the quarterly CPI print is not the only factor they will look at. The rate curve responded by shifting down 9-10 basis points (bp).

The probability of a February hike now sits at 25%, while implied odds for a move by the 5^th of May meeting are around 75%.

One of the challenges for the Australian economy is lower productivity growth which leads to higher unit labour costs – a driver of services inflation which is key to core inflation.

Comparisons with the US highlight Australia’s weaker productivity trend, which acts as a cap on potential growth and is forcing the RBA to slow growth down even from historically lower levels.

Consensus currently has Australian growth for CY26 at 2.1%. This is probably reasonable, as the risk to the upside is limited by the focus of the RBA to stop growth fuelling inflation.

Markets

Market sentiment remains broadly positive, supported by the outlook for growth, rates and earnings.

The key risk is elevated valuations and strong positioning, which leaves the market vulnerable should fundamentals shift – similar to the pattern seen early last year.

However, unlike last year, the risk appears lower in CY26 given the Trump administration’s focus on the mid-terms, making it unlikely they introduce policies that would materially impair earnings as tariff actions did previously.

The other issue to watch is where the leadership in the market is. We have seen in the US a rotation back to value and this is consistent with the improving economy and is also tied to the uncertainty around whether AI investment is sustainable.

Australia has seen an even more stark rotation away from growth and tech names to resources given the strength in commodity prices.

US earnings season kicks off next week. Consensus has 7% EPS growth year on year in Q4 25, compared to >10% across the first three quarters.

CY25 performance was underpinned by actual earnings materially exceeding expectations. For CY26, the market is looking for 12% EPS growth to US$305, implying a forward P/E of 22.8x.

Breaking down the US between the Mag 7 and the remaining 493 companies of the S&P 500, the market expects EPS growth to widen in Q4 but then narrow through CY26.

Revisions continue to favour the Mag 7, though this is not currently translating into continued outperformance.

Australia has had a more muted start to CY26, following on from reasonable performance in CY25 with the S&P/ASX 300 up 10.7%, although performance lagged most major global markets. The December quarter fell 0.9%.

Sector dispersion in CY25 was significant. Materials led with a 37.5% gain, driven primarily by gold. Industrials rose 17.2% on broad based strength, while banks gained 16.7%. Technology (-19.1%) and healthcare (-23.9%) were the major laggards, with CSL the key detractor, though the rest of the sector also underperformed.

So far in CY26, the escalation in geopolitical risk from Venezuela supported a rally in associated proxies, particularly defence and rare earth names. Lithium and copper stocks also outperformed, supported by firmer underlying commodity prices.

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About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Collective action is essential for addressing global challenges like climate change, food security, and pandemic risks. MURRAY ACKMAN and PAULA VALDES explain

• Collective action addresses global challenges
• Challenges and regulatory landscape
• Find out about Regnan Credit Impact Trust

WHAT does it take to tackle climate change, food security, or pandemic risk? At the recent PRI Stewardship and Collaboration Forum, the answer was clear: collective action.

The United Nations Principles for Responsible Investment (UNPRI) brought together global leaders in sustainable finance.

This Sydney forum, hosted by Regnan, convened 45 asset owners, managers, and responsible investment professionals to share insights on collaborative stewardship. Regnan’s Grace Zhang presented at a similar event in Melbourne.

The power of collective action

Investors face challenges that are global and demand collective action. Issues such as climate change are beyond the control of one individual company or investor.

Investors who view their activities within the context of interconnected, dynamic systems recognise their role in building resilience across the financial ecosystem.

This systems-thinking approach has long been central to Regnan’s research, engagement, and advocacy.

It is why Regnan is actively involved in industry associations and initiatives within the responsible investment industry.

Why collaboration matters

Collaboration gives investors access to diverse perspectives, shared intelligence and optimises resources. It also offers greater scale.

Regnan has long recognised the importance of bringing voices together to address big challenges. Since Regnan became part of the Perpetual Group, stewardship opportunities have been amplified.

This represents greater funds under management (FUM), which has increased influence. Collaboration also enables different engagements across geographies, asset classes and fund types.

We have found within the Perpetual Group that collaboration allows for diversity of thought through challenging assumptions and improving decision quality.

Regnan research highlights that to achieve true diversity is not just by having varied backgrounds, but by also cultivating a culture where differences can be valued and expressed.

Regnan also seeks to bring voices together across our industry. This has included hosting like with the PRI event earlier this month, as well as facilitating and bringing communities together.

A few years ago, Regnan brought together different links along the food production supply chain to discuss sustainable agriculture.

Last month, we walked around the Regnan eucalyptus trees we get our name from with key leaders in the biodiversity space for an exploration of the work Regnan is doing in advocating the Great Forest National Park.

Regnan is also a supporter of the other initiatives by the UNPRI, working with the SPRING initiative which relates to nature, co-leads the Collaborative Sovereign Engagement on Climate, and has a longstanding membership with the Climate Action 100+ initiative.

Challenges and realities

Positive intentions alone do not guarantee smooth collaboration. As anyone who participated in group projects at university knows, not all contributions are equal.

Internal alignment with specific funds, mandates, and client expectations are essential.

Collaboration must connect with other stewardship and engagement efforts to avoid “collaborative fatigue” – multiple meetings with nebulous outcomes that fail to advance the purpose of the funds.

Navigating regulation

Regulatory challenges are increasingly shaping the landscape of responsible investment. In the US, political resistance has led to changes in shareholder rights, antitrust claims, and investigations into proxy advisors.

Closer to home, the ACCC has opened consultations to introduce a class exemption for certain types of beneficial collaboration.

It is vital that joint stewardship activities, such as engagement on climate, human rights, and governance, remain permissible under competition law.

Restricting such collaboration could undermine efforts to address systemic ESG risks that require collective action.

Looking forward

Collaboration does not negate competitive tension. Our clients expect us to undertake stewardship activities that provide meaningful investment insights and strengthen portfolio holdings.

Nevertheless, collaborative stewardship is essential for managing systemic risk.

Regnan has been a pioneer in using a systems-thinking approach to sustainable investing, and involvement in these collective initiatives is vital to support the health and resilience of the entire system (which, incidentally, includes our investable universe).

The stewardship work Regnan does for Regnan funds, and the support provided across the Perpetual boutiques, treats stewardship as a beneficial component to active management.

Leadership in collaboration activities allows us to leverage our research and experience, ultimately making us better stewards of the portfolios we influence.